Saturday, December 1, 2012

The Perfect Hedge Fund Predator?

Eric Owles of the NYT Dealbook blog reports, Portraits of a Hedge Fund Titan:
Even before Steven A. Cohen’s very bad week, the media narrative surrounding the hedge fund billionaire was well known: an intimidating temper that has mellowed with age, a bad back enflamed by the same, a hedge fund with a track record better than the Yankees and partial ownership of a baseball team whose standing is decidedly less stellar. This week, we review the highlights.

Like many billionaires Mr. Cohen, who has not been accused of any wrongdoing, shuns the media spotlight, but that hasn’t stopped journalists and colleagues from painting colorful portraits that compare him to characters from Henry Melville and Miguel de Cervantes.

“It’s a Darwinian and pressure-packed culture with ridiculous amounts of money at stake,” a former employee of SAC Capital told DealBook last year.

The closest Mr. Cohen has gotten to a media grilling recently was a sit-down with Paul Tudor Jones, another hedge fund manager, at a Wall Street-sponsored conference. Mr. Cohen is “almost as secretive as Howard Hughes,” one source told Businessweek in 2003. The comparison has stuck with the money manager despite his prominent forays into worlds of art, sports and politics.

In 2006, his hedge fund was focus of a widely criticized “60 Minutes” report on short sellers. His ex-wife, Patricia Cohen, told New York magazine that the television report was the impetus for her lawsuit over money involved in their 1990 divorce. The suit was later dismissed.

As the charges against former traders at his $14 billion hedge fund mounted, Mr. Cohen gave a rare interview in 2010 to Vanity Fair, saying that “in some respects I feel like Don Quixote fighting windmills.”

Or perhaps Mr. Cohen is, as Reuters described last year, the Feds’ Moby Dick, an allegory that would make Robert S. Mueller, director of the Federal Bureau of Investigation, a modern-day empty-handed Captain Ahab.

In the end, the high-minded literary references may not capture Mr. Cohen’s story as well as a man who inspired Bruce Springsteen, New Jersey’s true poet laureate. It could be that Preet Bharara, the United States attorney in Manhattan, could write the hedge fund titan’s final chapter.
Joanna Slater of the Globe and Mail also reports, U.S. authorities eye hedge fund mogul Steven Cohen:
In the hedge fund world – a land of outsized profits and enormous egos – they don’t come any bigger than Steven Cohen.

There’s the gigantic estate in Greenwich, Conn., complete with its own ice-skating rink and Zamboni machine. There’s the glittering art collection, reported to include works by Vincent Van Gogh, Paul Gauguin, and Jackson Pollock.

And of course, there’s the track record: returns averaging roughly 30 per cent a year over the last two decades, a performance which turned Mr. Cohen’s firm into a colossus that manages $14-billion (U.S.), much of it his own money.

Now signs are growing that U.S. authorities intend to pursue him over allegations of illegal insider trading at SAC Capital Advisors LP, the firm he founded in 1992.

On a conference call with investors on Wednesday morning, SAC revealed that it had received a notice last week from the U.S. Securities and Exchange Commission indicating that it is planning to file civil charges against the firm.

The notice doesn’t name Mr. Cohen, but authorities are considering extending the charges to include him, Bloomberg News reported.

The development comes only days after U.S. authorities filed criminal and civil charges against a former SAC trader, Matthew Martoma. They accused him of turning confidential information about a pharmaceutical drug trial into trades worth $276-million.

Mr. Martoma made those trades, authorities alleged, in consultation with someone identified in court documents as “Portfolio Manager A” and the “hedge fund owner.” Though he is not mentioned by name, those descriptions refer to Mr. Cohen. Mr. Cohen, 56, has not been charged with any wrongdoing.

Early on Wednesday, Mr. Cohen spoke to investors for about a minute at the start of the conference call, according to reports. Regarding the recent allegations, he said, “We take these matters very seriously, and I am confident that I have acted appropriately,” The Wall Street Journal reported.

A spokesman for SAC said he had no further comment beyond a statement issued last week, where the firm also said its conduct was appropriate and that it would continue to co-operate with U.S. authorities.

“The government’s investigation is moving closer to the finish line,” said Jacob Frenkel, formerly a federal prosecutor and lawyer with the SEC. “Who’s going to cross it and in what position is yet to be determined.”

The key question is whether Mr. Cohen will face any charges. The government’s sprawling investigation into insider trading has already netted several big fish – hedge fund manager Raj Rajaratnam and former McKinsey & Co. chief Rajat Gupta – but Mr. Cohen would be by far the most prominent investor pursued by authorities, should they proceed.

His investing performance has long elicited both envy and suspicion. The murmurings have grown louder in recent years as the government probe turned up numerous connections to SAC. Mr. Martoma is the fifth former employee of Mr. Cohen to face insider-trading charges related to his time at the firm.

The Connecticut-based company is known for its sink-or-swim ethos, which is harsh even by hedge fund standards. Winning traders are rewarded handsomely while anything less means an unceremonious exit. In its complaint against Mr. Martoma, the government claims that he reaped a windfall for SAC through illegal trades and received a bonus of $9.3-million. But less than two years later, he was fired. One executive described him in an e-mail as a “one-trick pony.”

For now, it appears that Mr. Cohen’s investors are not stampeding to withdraw their funds, although that could change quickly. Three former employees of SAC declined to discuss its culture and investment approach.

As for Mr. Cohen, he has poured some of his estimated $8.8-billion fortune into his Connecticut home (after numerous additions, it now measures more than 35,000 square feet) and into expensive artwork. He reportedly paid $8-million for a work by Damien Hirst which consists of a shark in a tank of formaldehyde.

“Art is a great diversion from looking at numbers,” Mr. Cohen told The Wall Street Journal in a rare interview in 2006.
$8 million for a shark in a tank of formaldehyde? How tacky but fitting for Steve Cohen, one of the biggest hedge fund sharks in the world (I'm fascinated by sharks too but prefer watching them on Discovery or National Geographic).

It seems like hedge fund sharks are on the SEC's menu these days and Steve Cohen is the prize catch. The agency would love nothing more than fill him up with formaldehyde and mount him up in their headquarters as a warning to other hedge fund predators: "If we can catch Cohen, we can catch anyone."

But proving insider trading took place, especially with someone as powerful and paranoid as Steve Cohen, will be difficult, if not impossible. Guys like Cohen cover all their angles with an army of legal advisors and know how to protect themselves in case anyone under them is convicted of any wrongdoing.

Still, this case could prove to be the "big one" for the SEC. Dan Freed of The Street reports, Steve Cohen As Snitch Could Get Interesting:
Author Bill Cohan was on target when he asked on Wednesday whether U.S. Attorney for the Southern District of New York Preet Bharara is making wise use of precious government resources in trying to ensnare SAC Capital hedge fund giant Steve Cohen, but he left out one interesting possibility: what if Bharara flips Cohen?

Nailing Cohen on insider trading charges--and as Cohan points out, it's far from a slam dunk--will be unsatisfying to many of us who are still angry about the fact that, as Cohan puts it, "the people responsible for the worst financial crisis since the Great Depression continue to get off scot-free." We want to see top brass at Lehman Brothers, Bear Stearns, Merrill Lynch, or maybe even Goldman Sachs or JPMorgan Chase take a fall.

The difficulty is it isn't clear what laws were broken. Wall Street rewrote the laws--allowing banks to merge with securities firms, keeping over the counter derivatives free from regulation, making it okay to hide debt off the balance sheet--or even to shift in on and off just before the end of every quarter, as in the case of Lehman Brothers' "repo 105" transactions.

Still, there may have been slip ups. It's supposed to be illegal to tie loans to other investment banking products, for example, but banks do it all the time Citigroup, AIG, Bank of America, and other firms told bald lies to shareholders and have paid record penalties. Still, proving the kind of intentional wrongdoing required for a criminal conviction has proved difficult for prosecutors--at least when it comes to top management.

But if there is information to be gotten, its likely Cohen has it. His giant hedge fund is all about finding information that can't be accessed anywhere else. The big securities dealers fall all over themselves trying to give SAC the best information they have so he will trade with them and allow them to ring up trading commissions. Cohen has had access to any head of any Wall Street bank he has wanted for years. If he is forced to cooperate with the government, we may finally see the kind of case we've been waiting for.
Indeed, this could be the case of all cases. Investment dealers routinely bend over backwards for SAC's business, providing their portfolio managers with an "informational edge." They do this with all their elite hedge fund clients to rack up trading commissions. 

As far as SAC and Steve Cohen, I'm convinced that his shop wasn't always kosher but that doesn't say much because I can say the same about a number of other other top hedge funds and mutual funds which regularly engaged in insider trading. Most of these shops have now moved on to high frequency trading and naked short-selling.

The other thing I'm convinced of is Steve Cohen deserves a place in the "hedge fund hall of fame." Love him, hate him, it doesn't matter, he's an exceptional trader who surrounds himself with some of the best traders and analysts in the business which he pays exceptionally well. His passion for markets and winning is undeniable, which is why many investors still pay him a hefty fee for managing their money.  It's also why I track his portfolio moves carefully every quarter in my ultimate 13F guide.

Below, Bloomberg Businessweek's Sheelah Kolhatkar discusses whether SAC's sink-or-swim culture discourages ethics. She speaks with Deirdre Bolton on Bloomberg Television's "Money Moves."

Also, former U.S. Securities and Exchange Commission Chairman Harvey Pitt talks about SAC Capital and the Obama administration’s selection of SEC Commissioner Elisse Walter to replace Chairman Mary Schapiro. Pitt speaks with Erik Schatzker and Sara Eisen on Bloomberg Television's "Market Makers."

Finally, a Discovery clip on nature's perfect predator, the great white shark. Is Steve Cohen the perfect hedge fund predator or is he misunderstood like these sharks? We'll soon find out but those seals and whales great whites feast on look like retail investors and large pension funds, all part of the hedge fund food chain.